Trump has threatened to fire the chair of the US Federal Reserve. That could be bad news for inflation
US President-elect
Up until this week, that may have seemed like a distant and outlandish prospect. Now, we again have to take it seriously.
Powell himself certainly is – and has already begun pushing back on the front foot. Responding to the threat on Thursday, he insisted he will not resign. Further, he said any attempt by Trump to remove him was “not permitted under the law”.
Whether Trump actually attempts to follow through on his threat will provide an early litmus test of any potential authoritarian tendencies.
Powell’s dismissal would breach long-standing norms of central bank independence. If successful, such a move could have a serious impact on democracy and the separation of powers, with consequences around the world.
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An old quarrel
The feud between Trump and Powell is nothing new. Trump himself actually appointed Powell to the
Criticising the
Beyond Trump, many economists have praised Powell’s management of monetary policy, which has successfully reduced spiralling inflation rates. President
Trump, though, only stepped up his criticisms, many of which became inconsistent with his earlier position. In February this year, he was suddenly blasting Powell for even contemplating interest rate cuts.
Trump claimed baselessly that it was a political move by Powell – a lifelong Republican – to help
Could Trump actually fire Powell?
Trump has repeatedly claimed he has the power to fire Powell, and that as president he should have influence over the setting of interest rates.
The relevant legislation holds that a member of the
However, Trump could attempt to demote Powell from chair to an ordinary member of the
The closest historical precedent lies in an attempt by President
But the legal landscape has changed. It is possible that a Supreme Court sympathetic to Trump – which has previously found in favour of expanded executive presidential power – might reach different conclusions.
Inflation, inflation, inflation
If Trump does attempt to remove Powell, it will radically affect the independence of the
This would likely increase inflation in the long run. If markets believe politicians are likely to interfere in the setting of interest rates to favour their own short-term political interests, investors will expect lower interest rates in the future.
This expectation alone is sufficient to cause inflation, and a major reason why most developed countries now insulate their central banks from direct political control.
Ironically, promising to reduce inflation was a central plank of Trump’s successful election campaign. How Trump approaches Powell’s future will therefore be closely watched by markets.
Checks and balances
Trump’s view that the president should have power over both independent government agencies and interest rates reflects his widely noted “populist” approach to politics.
Populist politicians claim to embody the popular democratic will. Accordingly, they often oppose institutional checks and balances on their powers, viewing them as impediments to the democratic mandate they claim to represent.
The US political system has historically had a lot of checks and balances. The idea is to limit the amount of power any one politician or party can accrue.
The “separation of powers” – a cherished principle in
If Trump fires Powell, it will provide a strong indicator of how a second Trump presidency will approach the separation of powers, and suggest concerns about Trump’s future authoritarian intentions are justified.
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